Emerging markets seek next catalyst as dust of midterms settles

November 7, 2018
135

By Lilian Karunungan and Netty Ismail

As the results of the U.S. midterm elections became clearer, investors began reassessing opportunities in emerging markets amid a slew of headwinds from President Donald Trumps trade policies to the end of easy money.

An MSCI index of emerging-market currencies rose as the dollar stayed on the back foot, with a divided Congress emerging as the most likely result after Republicans retained control of the Senate and the Democrats looked poised to wrest control of the House. While investors are likely to welcome the removal of the uncertainty surrounding the vote, focus is now shifting to possible policy gridlock amid an escalation of the U.S.-China trade friction and further removal of stimulus by the Federal Reserve.

“Investors are going to be relieved to have midterm election news out of the headlines,” said Hannah Anderson, a global market strategist at JPMorgan Asset Management in Hong Kong. Still, with the midterm results, “nothings going to change on the trade front. Fears and sentiment about trade are going to continue to be reflected across the EM complex, at least for the next couple of months.”

“We are looking at a consolidation in EM and further gains in the Mexican peso and South African rand”

The fund holds “small” wagers that seek to profit from gains in the peso and rand

“The House/Senate vote was priced in. The real cat in the hat is the Fed, and the risk is that we could see the back end of the curve dip again”

“The risk is that the Fed may begin to rein in their language on potential future hikes in 2019. The risk is that the Fed takes a strong look at the housing numbers and begins to make that a focal point”

Jan Dehn, head of research at Ashmore Group in London:

“The most obvious implication for EM is that the second of three major risks, which have been holding back investors from returning to EM local markets in the second half of 2018, is now behind us”

The first of these risks was the Brazilian election, and the final one for the year is position squaring, which typically occurs toward year-end but unlikely to have lasting or fundamental implications

“The green light for EM local markets just got significantly greener”

As politicians begin to focus on the 2020 election and seek to keep the U.S. economy buoyed, Republicans will likely push the Trump administration to pursue more cautious economic policies, particularly on trade

Investors should lower their U.S. growth expectations, as the Fed may do so with the reduced likelihood of large stimulus measures; the probability of recession is also higher, at the margin

Categories

Tags

The Current Affairs Online UK

The Current Affairs Online is UK based news website interested in the UK and European affairs, economy, politics and trade. The website relies on Rss Feed from other UK and European news agencies plus articles and opinions written by our columnists and reporters. The website offers PR services for companies and news websites.